Managing Settlement Risk in Today’s Market Conditions
As residential property sales and market value continue to decline, and lending conditions continue to tighten, we seem to have entered a “perfect storm” that will drive a major increase in settlement risk for off the plan purchasers and see supply ahead of demand in our major cities.
As many purchasers would have bought when the market was peaking just a short couple years ago, valuations are starting to come in short across most areas, especially in high density suburbs where market value has dropped significantly. Try explaining to a single mother who was planning to occupy that her $1million property that she spent years saving for received a valuation for $900K. Not many people have an extra 100K lying around.
Investors who have extended themselves in the past few years when banks were more than happy to offer interest only loans are now finding out they are simply not able to afford settling on any new properties and many of these investors have been forced to re-finance their existing loans.
Developers that are completing high density residential projects within the next 2-3 years should try to reduce and minimise their settlement risk with a clearly defined strategy and focused effort. There are ways to mitigate these issues for developers willing to engage and work with their buyers through these tough market conditions. Adopting some of these important settlement strategies could make all the difference once settlement is due.
As a specialised settlement management agency, here are some tops insights we’ve learned along the way.
Be prepared & Start Early
As a first step - find, hire or build your settlement dream team (if you don’t have one already)! Don’t rely on your selling agents or admin staff to do the hard work. To get the best possible results at completion your settlements should be managed professionally and with a team that is solution oriented and focused on customer service.
I am always confused and surprised that after years of planning, financing, construction, marketing, sales and management going into each project, many developers simply fail to see the importance of building professional settlement strategy and team.
Why go through all this effort without ensuring you have the highest chance of success when it comes to settlement?
We have seen many purchasers these days willing to walk away from their 10% deposit more and more often as reselling their property at a lower value could mean losing even more. We recommend speaking to purchasers at least 6-9 months prior the estimated completion. Identify any settlement risk issues as early as possible and empower your purchasers to find the right solution as far in advance as possible.
Communicate regularly with your buyers and get to know them
Understand their needs, issues, and consistently assess risk. Guide your buyers through each stage of the settlement process using a focused strategy that has been thought through and prepared well in advance.
There are so many important principles within getting them finance ready, implementing a comprehensive valuation strategy, to presenting their property at the pre-settlement inspection. Each step of the settlement process must be carefully planned, and results well documented by your settlements team.
Be Supportive & Flexible
Regardless of the why some purchasers are having difficulty with settlement, make their problems your problems. Good old-fashioned customer service is more important than ever but I’m talking about real customer service. The type that is highly engaged and collaborates with your buyers to come up with a range of solutions.
No doubt you can be stern, strict, and forceful with your communication and settlement terms, terminate contracts and keep 10% deposits, but in these market conditions you are not doing your bottom line and brand any good with having more stock on the market and upsetting your most important assets - your customers.
You must try to remember – buyers want to settle just as much as you want them to. Tighter lending conditions by banks, low valuations, high interest rates, restrictions on overseas transfers and other factors that are completely outside of the buyer’s control is what’s driving these settlement issues. We are all in this together so if a buyer may need more time to transfer funds, bank is delaying paperwork and settlement dates get delayed by a few weeks – try to adopt some flexibility and not penalise your buyers for matters outside their control. They will remember you for this and praise your flexible attitude to their network. Think from a brand perspective – what do you want to be known for?
These next 2-3 years may be an uphill battle for many developers with declining market values predicted to fall by 20% in Sydney and Melbourne, record low sales results and settlement risk greater than ever. It might be time to trim the fat in your organisation and get down to basics to get through these challenging times and not lose friends (buyers) along the way. Who knows what the driving factor will be when the market picks up again.
Developers should do all they can now and adopt strategies that support their buyers with flexibility and specialised services to achieve the highest possible rate of successful settlements and any possibility of repeat purchasers in the future.
Each and every single buyer matters and should be treated as the most important client.
These principles should apply regardless whether you are a small developer building a few townhouses to large developers building hundreds of units in high density areas.
Ensure your efforts drive this mindset as it can make all the difference when settlement is due and when buyers are looking at making their next purchase.
If you would like some advice on managing your settlement risk, contact us here.
Leor Shavel is the Managing Director of Sierra PropertyCom who specialise in settlement management services and buyer engagement solutions for property developers.